Guilty Plea in $400 Million ArthroCare Securities Fraud Scheme

A former senior executive of Texas-based ArthroCare Corp., a publicly traded medical device company, has pleaded guilty for his role in a scheme to defraud the company’s shareholders and members of the investing public by falsely inflating ArthroCare’s earnings. Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division and U.S. Attorney Robert Pitman for the Western District of Texas made the joint announcement relating to the plea.

David Applegate pleaded guilty to two counts of a superseding information which charges him with conspiracy to commit securities, mail and wire fraud and with a false statements violation. Applegate, who was the senior vice president in charge of ArthroCare’s Spine Division, admitted that he and other co-conspirators inflated falsely ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors. He also admitted that he and other co-conspirators caused ArthroCare to file a Form 10-K for 2007 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings.

Between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.